As Surrey tax accountants we see a lot of situations where businesses, most often through no fault of their own, are facing a tax enquiry into their financial affairs. Whilst enquiries are often undertaken by HMRC randomly, often they arise because HMRC have information which does not agree to information included on returns submitted by the business, or because returns submitted do not conform to HMRC’s expectations. (more…)
1 Comment May 16, 2012
Now that the top income tax rate is definitely being cut to 45% and we know this will take effect on 6 April 2013, clients may be wondering if they can avoid paying the 50% rate altogether. For some taxpayers, the 50% tax rate coupled with the withdrawal of the personal allowance for higher earners has meant they have been taxed at an effective rate of 62%. This happens where total income falls into the £101,000 to £113,000 band where the erosion of the personal allowance has the biggest impact.
For many it is possible to delay receiving income until the 45% rate takes effect – this really depends on how much flexibility you have over how you receive your income. What we are suggesting as tax advisers is to weigh up the viability of temporarily reducing your income for the current tax year, until the 50% rate is removed.
Tax planning like this obviously needs to factor in two things: can you afford to be flexible and potentially survive on less money this year to cut your tax rate for longer-term gain? And do you have the ability to influence the ways you can take your income?
Assuming the answers to those questions are yes, here are some tactics you can consider. We would always suggest you discuss the ramifications with one of us beforehand, but this list will give you some useful food for thought.
#1 Incorporate your business
A very good way to shelter excess income from higher rate tax is through a limited company. A limited company provides flexibility which is not available to sole traders or partnerships, therefore clients who are sole traders or members of partnerships or limited liability partnerships (LLPs) should consider incorporating all or part of their business.
Running your business as a limited company (by incorporating) offers many tax planning opportunities. This is primarily because of the additional flexibility offered over the way your income can be taken, for example as salary, benefits or dividends.
#2 Use and manage your director’s loan account
For those running their business through a limited company, routing dividends through their director’s loan account can be useful for spreading income. A director’s loan account requires careful monitoring because if it goes overdrawn for any reason, there are adverse tax consequences both for the director and the company. Overdrafts such as these can be minimised (or even avoided) if loan accounts are monitored and reviewed on a regular basis and any necessary action required to minimise tax is taken.
The status of a director’s loan account should always be reviewed both at the company’s year end and at the tax year end, in line with directors’ income levels so that any necessary adjustments can be made, and to provide maximum opportunity to reduce tax liabilities. Whilst it is possible to do this after the company’s year-end, or when the accounts are being prepared, there is less scope to reduce the tax liabilities arising because planning options are significantly reduced. It is worth discussing this with us sooner rather than later to see what steps might be taken.
#3 Income equalisation
How might you be able to reduce your income but maintain your existing standard of living as much as possible? If you are an owner director with a non-working spouse, one option to consider is income equalisation. Can this be done through salary or dividends? This will depend on the facts of the case, but should certainly be considered.
#4 Consider tax efficient investments
Another possible tax planning option, for those with excess income, is to consider a tax efficient investment option in an approved small enterprise. Provided you have a well-diversified investment portfolio and understand the risks, Venture Capital Trusts (VCTs) or investments through the Enterprise Investment Scheme (EIS) or the new Seed Enterprise Investment Scheme (SEIS) may be suitable and will help to reduce your income tax liability for the year.
Especially of interest for business owners thinking about their next venture, it is possible to invest in your own start up company through SEIS with your own funds as an owner director. This is a very attractive opportunity and the main qualifying condition is that the venture must be a completely new entity to qualify. We have covered SEIS in detail this month, read our other article for more information about this scheme.
#5 Consider longer term investments
Interest arising on funds invested becomes taxable when the income is credited to the account. Often investments will be made for a fixed term, with the interest accruing once the fund reaches maturity. If this maturity date arrives before 6 April 2013, the interest will be taxable at 50% for those with total income over £150,000; if the fund matures after that date, the tax rate will be 45%
#6 Maximise tax relief on pension contributions
There are issues with pensions currently due to interest rates being so low, but in spite of this, they remain a very tax efficient investment. You might want to consider reducing your taxable income levels by increasing pension contributions and making use of the maximum tax-free allowance. This can have a double benefit because in addition to reducing your personal tax rate, limited companies can obtain corporation tax relief on pension contributions of up to £50,000 a year for each director. There may also be an opportunity to bring forward unused contributions from previous years, but this needs to be analysed carefully as the legislation surrounding this area is complex.
If you would like to discuss these ideas in more detail, please email Lesley Stalker at las@rjp.co.uk.
Leave a Comment April 30, 2012
Continuing with our detailed analysis of the tax planning opportunities that arose following the Budget 2012, we turn our attention to tax efficient investment opportunities. We already have VCTs and EIS, both of which we have covered in detail before. These were further enhanced in the Budget with a new scheme, SEIS (Seed Enterprise Investment Scheme), which is specifically aimed at start up companies.
Tax relief under SEIS started to become available on 6th April this year, although we are currently awaiting Royal Assent, and is expected to be available until at least April 2017. SEIS offers a more tax efficient way to invest in new ventures and, for the business owner, a useful way of obtaining finance for a new venture, up to a maximum level of £150,000.
How SEIS works
SEIS allows anyone who invests up to £100,000 in a tax year in a qualifying company to benefit from 50% income tax relief on the amount they have invested and, depending on their circumstances, to also benefit from full CGT relief. The income tax relief can either be backdated to a previous year or be given for the year the investment is made.
For investors, this represents another way to get 50% tax relief alongside pension contributions.
Qualifying criteria for SEIS
The rules, as relevant for different stakeholders involved in SEIS are as follows:
Our verdict on SEIS
This is a more tax efficient scheme than EIS as 50% income tax relief is achieved; together with full CGT roll-over (i.e. there is no clawback of the gain rolled over when the SEIS shares are sold). However the amounts that can be raised by companies and contributed by individuals are severely restricted, making this scheme applicable for small start up businesses only. For those businesses however, it can help attract very valuable funding for growth in the early years. And although there are quite a few rules to navigate, this is a very useful scheme, which benefits investors and business owners alike.
For more information on investment related tax planning please contact Lesley Stalker by emailing las@rjp.co.uk.
Leave a Comment April 30, 2012
According to Government figures, R&D tax credits provide nearly £1 billion of support to over 6000 UK companies. Over the past year, RJP has helped many clients to reduce their corporation tax bills – some to almost nothing – by taking advantage of the Government’s R&D tax credits scheme. This is a generous relief and allows over 200% of the money invested in qualifying R&D activities to be offset against corporation tax. (more…)
Leave a Comment April 27, 2012
Setting up an EMI share scheme can be a very useful tax planning tool. Some important changes were announced to the EMI enterprise management scheme in last month’s Budget. Overall, the net result is a very positive one, as it significantly widens access to EMI options. These have been shown to be a worthwhile and tax efficient method of offering share options to employees. In addition to broadening access to the scheme itself, the individual limits to the amount of shares that can be held have also been increased. (more…)
Leave a Comment April 13, 2012
Yesterday George Osborne proved that Budgets aren’t always borning and predictable. His proposed shake up and simplification of the tax system in Briatin is wide reaching and will offer many pros (and cons) to business owners looking to cut their tax bills.
Lesley Stalker gave her views on the matter to Businesszone’s editor Dan Martin. You can read the full article here.
Leave a Comment March 22, 2012
After the fanfare of publicity and stern warnings issued in recent months, HMRC has taken a U turn on its business record checks campaign. Now, rather than making threats of indiscriminate inspections to identify record keeping issues, they have declared any future inspections will be much more targeted.
HMRC has said that they will carry out any planned visits but will postpone any new SME business record checks (BRC) until a new approach has been developed which concentrates on higher risk businesses. New visits will not resume until HMRC announces the detail of a ‘revamped’ approach, which is expected some time after April 2012. (more…)
Leave a Comment February 27, 2012
There are a lot of changes afoot this year for business owners with the government planning plenty of new policies for employers. Taking a short break from tax issues, we outline some of those most likely to impact our clients.
Pensions
Although the government has announced that automatic enrolment legislation for pensions will start as planned for employers with more than 250 employees, smaller companies are being given more time. Organisations with between 50 and 249 employees are getting an extra year, and will need to start auto-enrolling employees between 1 April 2014 and 1 April 2015. Companies with under 50 employees will not have to auto enrol their staff for pensions until April 2017. (more…)
Leave a Comment February 27, 2012
As announced in the 2012 Finance Bill, there have been a number of important changes to VAT rules, which it is important clients are aware of.
1. VAT and Academy schools
We have recently come across a number of academies who have applied for VAT registration without taking proper advice in relation to the implications and without weighing up the pros and cons of what VAT registration means for them. It is actually possible for schools with academy status to reclaim VAT incurred on non-business activities without the need for VAT registration and all the complications that come with it.
Leave a Comment February 24, 2012
In last month’s Livewire newsletter, we reported a change to the ruling that shareholders informally winding up their companies can distribute any remaining funds as capital and depending on the circumstances, can also benefit from entrepreneurs’ relief.
With effect from 1st March, if the company concerned has distributable funds in excess of £25,000 all funds distributed will be treated as dividends and subjected to income tax in the usual way. This means tax will be payable at rates from 25% to 36% depending on the individual circumstances, rather than potentially at a rate of 10% if distributed as capital.
Leave a Comment February 23, 2012
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